10/29/2009 @ 3:00PM

How To Pick Winning Stocks In Today's World Economy

The word “overseas” was first used in 16th-century Britain to refer to colonial properties. It was popularized here after World War I to refer to anywhere outside North America. In the last few decades, it’s also been used to describe economic activity occurring outside of the United States.

With regard to business, it’s a concept whose validity has come and gone. People–most notably investors–who focus on what’s happening in the U.S. without regard to other places are doing so at their own risk.

In the U.S., it’s a risk that’s heightened by a parochial news business. Every morning I watch analysts and pundits on CNBC, FOX Business and Bloomberg opine about what is and isn’t happening in the U.S. They focus on the progress of our economic recovery, or lack thereof, our unemployment level and the punk nature of our consumer demand. They use the same tools and metrics as ever, as if the world were a stagnant place

All this misses the point that the U.S. is no longer the engine of world growth. Instead, we need to take our place in a comfortable seat in the first-class passenger car. While we are likely to do about as well economically as the world overall, we are no longer in a position to define our own economic destiny.

What does this mean for investors? In terms of owning U.S. companies, it means focusing on firms that export our capital goods, technology (including green technology), energy, consumer brands and investment capital.

For over two centuries, our country has largely gone its own way in the world, often blazing a path for others. We benefited and suffered from an accident of history and geography. We took advantage of a 3,000-mile stretch of land over which one common language was spoken and our national currency accepted. We innovated and constructed a world of boundless opportunities and limitless growth.

Should Americans put most of their investments abroad? Share your thoughts in the Reader Comments section.

The American dream isn’t over. The United States still rules the world in terms of the size of our economy, strength of our military and innovativeness of our society. We are not about to witness the demise of America. However, there are limits to our growth, and some of our parochial practices are now coming back to haunt us.

During the last 50 years while we dominated world economics and politics and served as the global center of gravity, we expected others to adapt to our norms. Adapt they did. Hundreds of millions of people around the world became fluent in our language, even as a relative handful of Americans learned other languages. Many other nations are facile in currency conversion and understand accounting systems and cultural business norms across borders. In general we don’t.

Investors in our country have been and continue to be internally focused to a fault. In this country, when a financial journalist asks “What will happen to the market?” it goes without saying that the actual meaning is “What will happen to U.S. stocks”

The right question is what parts of our stock market will excel over the next decade. Some industries in America are suffering from their own shortcomings and the added pressure that came from recession and financial calamity of the past few years.

Some companies will never recover. Others will recover very slowly. In contrast, firms whose leaders have shifted from viewing their market as purely domestic, to viewing the world as one in terms of labor, capital and sales potential, will be very successful. Michael Jackson was actually quite prescient in his proclamation that “We are the world.” Among U.S.-based firms well along in globalizing their operations and thinking:
Yum! Brands
,
Cummins
and
Flowserve

The same pundits who view economies and markets in buckets labeled either domestic or foreign are the ones talking about the China bubble. They believe the BRICs (Brazil, Russia, India and China) will crash and burn as they run up against the limits of their own growth.

They make observations about what is wrong with China without taking the time to learn about what has really gone on in China since 1978. They talk about Japan’s lost decades. I was reminded by my friend Ed Yardeni that the Japanese had an exceptional growth run of 40 years prior to that. The “emerged” economies are just starting their growth runs, and they have human and natural resources far in excess of anything that was available in Japan.

With this as the backdrop, it’s obvious that viewing “The Market” as synonymous with U.S. stocks will surely get an investor in trouble. Looking instead for stocks in industries that will benefit from exceptional world growth will be quite rewarding, regardless of where they are domiciled.